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# Argentine Great Depression

No economy is immune to depression, including highly developed ones such as the United States, Germany, or Canada. During a depression, a country's economy can suffer from shrinking GDP, surging unemployment and inflation rates, and social disputes and riots.

Let's zoom in to a particular case today and see what we can learn from the Argentine Great Depression.

## The Argentine Great Depression (1998–2: overview

Before we look at the Argentine Great Depression, let's define a great depression.

A great depression is a sustained, long-term period of economic downturn, happening to a greater extent than a recession.1

The Argentine Great Depression was an economic recession that took place in Argentina from 1998 to 2002. Prior to this, a currency crisis had broken out in East Asia and Russia, lowering first-world investors’ confidence to invest in developing countries. When the crisis took a turn, Brazil's economy – Argentina's largest trading partner – plunged into chaos, both economically and politically.2

Picture of one of the 2001 riots that took place in Buenos Aires, Wikimedia Commons.

At the peak of the recession, Argentina experienced a surge in unemployment and inflation, sinking economic activities, and full-scale public riots. The Depression also put an end to the long-term fixed exchange rate between Argentina's Peso and the US dollar (1:1) and resulted in the country's default on its debt. It was not until 2003 that the Argentine economy started to recover, much to the surprise of the world.3

## The Argentine Great Depression: causes

Argentina's Great Depression stemmed from a mixture of external crises and government policy errors.

### External crises

As we already mentioned, during 1997–98, East Asia and Russia went through currency crises. This discouraged investors from the developed economies from investing in developing countries.

Later on, the crisis took turns to Brazil and the country responded by letting its currency float according to the demand and supply in the private market. This depreciated the Real (BRL) exchange rate from 1.21 BRL per dollar to 2.18 BRL per dollar.4 The country ended up in an economic recession. As the main trading partner of Brazil, Argentina also took a heavy toll.

### The 2000 tax increase

After the economic blow in 1998, the Argentine economy showed signs of recovery between 1999 and 2000. During this time, Fernando De la Rúa took the office and enacted the first of three tax increase packages.

But instead of gaining public trust in government finance, the tax raise backfired. Due to the tax raise, businesses were reluctant to borrow money for expansion and growth, which led to lower tax revenues for the government.

### Tax and monetary policy errors

The depressing outlook of the economy gave rise to political issues.

In 2001, many ministers resigned in protest over the proposed cut in spending. To strengthen his position, De la Rúa appointed Domingo Cavallo as minister of economy. Together they enacted two more packages of tax increases. However, the revenue generated failed to meet the projections.

Two more blunders in monetary policies added to Argentina's devasting situation. One was the bill to switch the exchange rate link of the peso-US dollar to a combination of the dollar and euro. Another was the announcement of a preferential exchange rate for exports.

The latter was a step back from the convertibility to an interventionist system where the government set different exchange rates to different types of traders instead of allowing everyone the same rate as in a free foreign exchange market.

A protest against banks in Buenos Aires in 2002. The banners say ‘Banks, you thieves, give us back our dollars’. Source: Pepe Robles, CC-BY-SA-3.0, Wikimedia Commons.

### Debt trap in mid-2001

The new taxes also lowered people's trust in the Peso. As a result, the interest rates rose dramatically, further discouraging businesses from borrowing money for growth and continuing the economic depression.

Some fiscal policies deeply damaged the private sector. One example was the deposit freeze enacted after the heavy withdrawal of deposits on Friday, 30 November. This halted all activities in the private sector as businesses could no longer make deposits to people outside of their banks. Riots broke out and on 20 December, both minister Cavallo and president Fernando De la Rúa stepped down from their position.

The government also had trouble repaying debts. They were caught up in a debt trap where the interest rate of loans grew so fast that they could no longer pay for it. On 23 December 2001, President Rodriguez Saá announced a default on foreign debt of US $93 billion.5 ## The Argentine Great Depression: consequences The Great Depression took a heavy toll on Argentina's economy. Here is a list of key impacts: • The GDP experienced a sharp drop from US$268.70 billion in 2001 to US$97.72 billion in 2002. It steadily recovered in the following years. Around 2006, Argentina's GDP reached the same level as before the inflation (roughly US$232.36 Billion). Figure 1 depicts this.

Figure 1. Argentina's GDP between 1990 and 2010, StudySmarter Originals. Created with data from the World Bank, data.worldbank.org

• Before the Depression, the exchange rate between Argentina's Peso and the US Dollar was 1:1. At the peak of the Depression in 2002, the figure was nearly 4 Pesos per Dollar. You can see this in figure 2 below.

Figure 2. Argentina's monthly exchange rate in 2002, StudySmarter Originals. Created with data from World Data, worddata.info

• In the early 1990s, the inflation rate in Argentina was relatively low (just above zero or negative). As the Depression hit, inflation rose drastically to 10.03% in 2000. The following years witnessed a few brief recoveries, which you can see in figure 3 below. However, the figure peaked again in 2005 at 25.87%, 2007 at 34.28%, and 2010 at 53.55%.

Figure 3. Argentina's inflation rate between 1994 and 2019, StudySmarter Originals. Created with data from Investing, investing.com

• During the inflation, Unemployment also reached an all-time high at 20% and did not recover until after 2002. The poverty rate was extremely high. More than half of the population was out of work in 2002. For those with a job, wages dropped by nearly 18%.

## The Argentine Great Depression: recovery

On May 25, 2003, Nestor Kirchner became Argentina’s president, and Duhalde, who had replaced Rodríguez stayed in government as the Minister of Economy.

After the election, the outlook of the Argentine depressing economy improved. With the devalued Peso, Argentine exports become cheap and more competitive abroad. The high price of soybeans in the international market also brought in a lot of foreign currency.

The government encouraged local products and provided accessible credit for businesses. It also improved tax collection and invested in social welfare. The peso slowly rose, reaching a 3:1 to the dollar.

Meanwhile, agricultural exports and tourism experienced a positive trend. At one point, the inflow of dollars was so high that the government had to intervene to keep the Peso from rising further. The central bank also rebuilt its dollar reserves. By December 2005, foreign currency reserves reached \$28 billion.

Despite several setbacks, such as a brief energy crisis due to the rising industrial demand, Argentina's economy bloomed:

• The GDP grew by 8.8% in 2003 and maintained an average growth of 9% ever since.

• The wages experienced a 17% annual increase between 2002–09. Real wages have risen by 72% from their low point in 2003 over a 10-year period.

• The gap of income distribution narrowed, and people's living standards improved.

• The unemployment rate dropped and hovered around 7% since 2011.

• The new auto market recovered from a low of 83,000 in 2002 to a record 964,000 in 2013.

## Argentina’s Great Depression: timeline

Here's a timeline of Argentina's Depression to recap what you have just learned:

 Time Period Events 1997–98 The currency crises in East Asia, Russia, and Brazil heralded the recession in Argentina. December 1999 Fernando De la Rúa was elected as the President and enacted the first of the three tax increase packages. This was supposed to restore people's trust in government finance. Though the effect was the opposite. Late 2000 - early 2001 The economy declined sharply. Ministers resigned from the Fernando De la Rúa regime in protest over the national spending cut. 2001 Together with Domingo Cavallo, the newly appointed Minister of Economy, De la Rúa enacted the remaining two tax increase packages. However, the revenues generated failed to meet predictions. 17 April 2001 Cavallo issued a bill to switch the exchange rate link Peso-Dollar to Peso-Euro. 15 June 2001 Cavallo introduced a preferential exchange rate for exports. This was a step back from the convertibility system to the interventionist system (the government set different exchange rates for different traders than allowing everyone the same interest rate). Mid 2001 Argentina fell into the ‘debt trap’. Due to plunging credit ranking, bond premiums surged from 3-9 percentage points to 20% in July 2001. The government fell into a debt trap — facing so fast the interest rate growth of bonds that they could no longer pay the debt. 1 December 2001 Cavallo announced the deposits freeze after the massive withdrawals at banks. This put the private sector at a halt as businesses couldn't make transactions outside their banks. 20 December 2001 Following riots due to the deposit freeze, Minister Cavallo and President Fernando De la Rúa stepped down from their position. 23 December 2001 The short-lived president Adolfo Rodríguez Saá announced a default on Argentina's national debt to foreign creditors. 1 January 2002 Eduardo Duhalde became president and made revolutionary changes to monetary policies, although the economy continued to shrink. August 2002 to mid-2003 The Depression subsided. 25 May 2003 Nestor Kirchner became president. Duhalde was kept as the minister of economy. The outlook of Argentina began to shift with exports and tourism recovering and the exchange rate stabilising. 2003–13 The economy experienced an incredible recovery: GDP increased from 8.8% in 2003 to 9% in 2004, 9.2 in 2005, 8.5% in 2006 and 8.7% in 2007. Employment and wages also rose while inflation dropped.

## Argentine Great Depression - Key takeaways

• The Argentine Great Depression took place from 1998-to 2002. The country entered the recovery stage in 2003.
• The currency crisis in east Asia, Russia and Brazil negatively impacted the Argentine economy.
• During the Depression, the economy of Argentina took a bad turn: unemployment and inflation rate surged, economic activities halted, riots arose, and GDP dropped sharply.
• External crises and a series of blunders in tax and monetary policies worsened the conditions of the Argentine economy during the crisis.
• The government's support for exports and provision of credits for businesses contributed massively to the economic recovery.

References

1. John A. Garraty, The Great Depression, 1986.

2. Alan B. Cibils, Mark Weisbrot, and Debayani Kar, Argentina Since Default: The IMF and the Depression, 2002.

3. Mark Weisbrot and Luis Sandoval, Argentina's Economic Recovery, 2007.

4. Jim Saxton, Argentina's Economic Crisis: Causes and Cures, 2003.

5. Rabobank, The Argentina Crisis, 2001/2002.

The Argentine Great Depression was an economic recession that took place from 1998 to 2002. It was triggered by the currency crises in East Asia and Russia which sunk foreign investors' confidence to invest in developing countries. When Argentina's biggest partner, Brazil, faced an economic crisis due to depreciating real exchange rates, the country plunged into a disordered state, both economically and politically.

To recover from the Great Depression, the government encouraged exports and allowed accessive credit for businesses. With the devalued Peso, Argentine exports became more competitive on the market and imports were discouraged in the country. The government also amended the tax blunder and allocated funds for social welfare, slowly gaining back people's trust. It also took steps to stabilise the Peso.

Argentina's Great Depression happened as a result of external crises in East Asia, Russia, and its largest partner Brazil between 1997 and 1999. The compounding errors in fiscal and monetary policies also worsened the conditions of Argentine economy during the 1998-2002 Depression.

It took place from 1998 to 2002. At the peak of the recession, Argentina experienced a staggering unemployment rate, a massive halt in economic activities, and deadly riots. The Great Depression also put an end to the Peso's fixed exchange rate to the US dollar (1:1) and caused the country's leader to declare a national debt default to foreign creditors. It was not until 2003 that the economy began to pick up.

To recover from the Great Depression, the government encouraged exports and allowed accessive credit for businesses. With the devalued Peso, Argentine exports became more competitive on the market and imports were discouraged in the country. The government also amended the tax blunder and allocated funds for social welfare, slowly gaining back people's trust. It also took steps to stabilise the Peso.

## Final Argentine Great Depression Quiz

Question

What is an economic depression?

A period of sustained, long-term downturn in economic activity in one or more economies.

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Question

When did the Argentine Great Depression happen?

From 1998 to 2002

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Question

What were the other crises taking place before the Argentine Great Depression?

Currency crises in East Asia, Russia, and Brazil

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Question

Who is the largest trading partner of Argentina?

Brazil

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When did Argentina recover from the Great Depression?

End of 2002, beginning of 2003.

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Question

Did the tax increases in 2000-2001 help  Argentina get out of the Great Depression?

No. They increased people's distrust in the government finances and discouraged businesses to borrow money.

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What were the monetary policy blunders in 2001?

• A bill was introduced on April 17 to switch the exchange rate link of the Peso-US dollar to a combination of the Dollar and Euro.
• The announcement of preferential exchange rate for exports.

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Question

What is an interventionist currency system?

The government decrees set different exchange rates to different types of traders instead of allowing everyone the same rate in a free foreign exchange market.

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What was the debt trap Argentine government face in mid-2001?

With the interest rate of loans growing so fast, it could no longer recover the debt borrowed. In July 2001, the rate stood at a high of 20%.

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Why did the Argentine government enact the deposit freeze on December 1? What were the consequences?

The deposit freeze was enacted on December 1 after the heavy withdrawal of deposits from banks on Friday, November 30. This halted all activities in the private sector as a deposit freeze means that businesses can no longer make deposits to people outside of their banks.

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Question

What caused the Great Depression in Argentina from 1998 to 2002?

Blunders in tax and monetary policy

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What helped Argentina recover from the Great Depression?

The devalued peso made Argentine exports competitive abroad and brought in more foreign revenues.

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What happened as Argentina recovered from the Depression?

The GDP grew by 8.8% in 2003 and maintained at an average growth of 9% ever since.

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Question

What were the consequences of the Argentine Great Depression between 1998 and 2002?

A sharp fall in Argentina's GDP.

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